SEF Trading: What Really Happened in Week 1?
By Colby Jenkins, TABB Group
Originally published on TABB Forum
Volume estimates for the first week of trading on swap execution facilities displayed a high degree of disparity and divergence. TABB examines the numbers.
Swap Execution Facility volume in rates swaps dropped by between 30% and 40% on a notional basis in the first week of mandatory trading, according to our analysis. On average, across the three main available data sources, we see a notional drop of between $23 billion and $60 billion per day over the past week, in comparison to average daily notional volumes for 2014.
For the purposes of this analysis, TABB normalized data from three sources: the Depository Trust & Clearing Corporation (DTCC), the International Swaps and Derivatives Association (ISDA) and Clarus Financial Technology.
We limited the scope of our analysis to specific criteria in order to make an apples-to-apples comparison across the three sources, which displayed a high degree of disparity and divergence in their volume estimates. We covered cleared interest rate swaps (IRS) transactions across all currencies and tenors, but excluded Forward Rate Agreements (FRAs) and block trades.
There are many reasons to exclude FRA volumes to achieve a meaningful view. First, FRA volumes are exclusive to the Dealer-to-Dealer market, specifically to ICAP’s Reset and Tullet Prebon’s TPMatch activity. Second, volumes attributed to FRA activity within these two SEFs alone is typically limited to one or two days of the week yet often times more than double the overall volume traded on a weekly basis – effectively obscuring any other trends within the data.
Depending on the source, daily notional volumes fell last week to:
- $48.5 billion from an average of $72 billion (-33%) (DTCC)
- $109 billion from an average of $160 billion (-32%) (ISDA)
- $91 billion from an average of $151 billion (-40%) (Clarus FT)
Despite the fact that there is a wide margin between some of the absolute volumes reported across our three sources, within each data set, the numbers all tell a similar story. As we anticipated, SEF volumes did fall as a result of the mandatory trade rule.
Exhibit 1: Average Daily IRS Volumes Per Week (DTCC)
TABB 2 27 14
ex-FRA
Source: DTCC, TABB Group
Notional Volumes according to Clarus’s SEFView data center (Exhibit 2, below) were consistent with DTCC’s figures (Exhibit 1, previous page) in terms of overall trend, peaking around the end of January and consistently dropping in the following weeks. Apart from an early spike in 2014, ISDA’s updated SEF volumes fall in line with those reported by Clarus (Exhibit 3).
Exhibit 2: Average Daily IRS Volumes Per Week (Clarus FT)
Tabb 2 27 14 2
ex-FRA
Source: Clarus FT, TABB Group
Exhibit 3: Average Daily IRS Volumes Per Week (ISDA)
tabb 2 27 14 3
ex-FRA
Source: ISDA, TABB Group
Given the extensive optionality within each data source, the disparity between some market commentators’ previous estimates of SEF volumes is somewhat understandable, albeit misleading. Some had pegged the drop in volumes to be as significant as 78% for the first week of MAT trading when compared to a 2014 average. Others responded with far more conservative estimates, going so far as to express doubt toward some data providers’ methodology. On Feb. 21, ISDA changed its methodology and released new statistics that indicated a far more moderate decline in volumes than previously reported.
Of the nine SEFs reporting IRD volumes, only the Dealer-to-Customer (D2C) SEFs have experienced positive growth throughout February. Bloomberg in particular has expanded its market share of SEF business in February, increasing by nearly 3% of total volume traded on SEFs since the beginning of the month. It is worth noting that this growth in particular is more a function of retaining volume levels as others fall than a pure increase in volume. Conversely, all six of the Dealer-to-Dealer (D2D) SEFs, incumbents in the swaps market, reported week-on-week drops in notional volume for this month.